VENICE ECONOMIC SUMMIT BRIEFING BOOK

Created: 7/9/1980

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Venice Economic Summit Briefing Book

Italy

Minister Francesco Cossiga will host the Venice Summit just as Italian politicians arc completing their preliminary assessments of oatioa wide regional and administrative ejections to be Heldlthoo these elections will have no immediate bearing on the stains of Cossiga's Christian Democratic/Socialist/Republican government, tbey will serve indirectly asa referendum on his tenure in office. The mood of the elector will guide party leaders as they look for answers lo the "Communist quest. xT and for ways to move beyond the short-term expediencies thai relumed Cossiga to power in April following ihe collapse of his first government. By fall the polilical hone trading that will follow theoifferentlone and shading if not in an

unlikely to receive much attention from the government until late the year, the economy should manage toercent, carried by the momentumtrong fourth9 showing. Although doing be on the growth front lhan most of its Summit partners, Italy will do wors ihe area of inflation. Spurred by sizable wage increases, higher energy ttarge public sector deficit, inflation will average aroundcrcco Ibis year. With export competitiveness falling and import costs rising, tl cnneaLaccount has returned to deficit, perhaps reaching S3 billion for i

ummit host hoping to bolster his domestic political image, Cossig will seek to downplay disagreements among the Seven. He is unlikely to sponsor any major initiatives or to lodge any bread substantive objectio: tryingto reinforce Italy's imageuiet but constructive memberubensitivity to being included in discussions among the xnai< Allies underlies Italy's desire to discuss polilical issues at tbe Summit.

* TV lulUo poEtkat iitirrcnilr nraenlcd becaotcof the teaadal: family of formeremocratic Party Deputy Secretary Donit-OiUB.nin'timnlly beine ionah( byfor oxmbenhip ia tbc Front Une tOTorat oraanbuiori. The oppMiikmbecaa to pro* for frimc Minbur Conies "iUul bclearcoJ of ibt ywtc? Docit-Citlin'l irvoivnikcel whiic sc at Interior Minuteryean Kg and tola* bbcolloiuc Umbbtoao*in( him to acapd

Accordmj lorcfitble ClwUwrwcmocraue fourcc, the Prime Minbter believe* be to iptemeailien drag out ioy full pailiameaury invenijiiiaotbc Venice Sirmm ind Praidcni Cintf'i "isii. The tame Kwccrvporu.bovmi'.thaabout his joiernraeni't dances of wrvMe*ear*

Cossiga hopes lhal lhc Seven can arrive ai common posilions on Iran and Afghanistan featuring limited economic measurestrong diplomatic stance. Cossiga docs not eipcct any major breakthroughs on the traditional agenda items for the Summit. The Italians probably will go along with likely joinl initiatives or slalcments on inflation, energy development, expanding North-South relations, and tradetion: thexremain reluctant to commit July lo specific energy targets"

Political Siluarion: Cossiga Redux

resent coalition is lhe fruitolitical truce thatwe-week-long government crisis in March, which was precipitated by the Socialists* withdrawal of parliamentary support from his firsi government. Each of the parties to lhe deal wanted toecond general ejection in lessear and the embarrassment ofaretaker government in office as Italy completed hs term as EC president and preparedresident Carter't state visit and the Economic Summit in JuncJ

honing*

This arrangement became possible when Socialist chief Bettino Craxi and the center-right leaders of theinocraiic Party agreedhopes of bringing along iheir respective leftexclude the strongly anti-Communist Social Democrats and Liberals from the government. The Christian Democratic and Socialist interlocutors reportedly hopedovernment alliance between iheir iwo parties-even if not an idealhelp iheir chances in the June election, weaken their respective internal opponents, and facilitate lhe creationive-party government after lhe vole. Cossiga. however, apparently insisted on including theshare the desire of left wing Christian Democrats and Socialists lo cooperate wiih tbe oppositionrxobably honing loridge government the Communists might later support]

of the parties has given evidencetrong cejtnmtimcnl to thisrogrammatic accord was reached in two weeks.would probably have taken much longer if the parties saw the present government as anything moretopgap- The government has refused to commit itselfignificant legislative program, and it is unlikely to do so. Nonetheless, even limited progress on lhe many problems facing the government and lhe country will influence tbe electoral tot In June and the negotiationsuccessor government. The recent, highly publicized stung of terrorist arrests comes to mind in thisthough il is uncertain whether ihey really amount to the breakthrough thai some have suggested

Election Calculus

The Italian polilical elite hat fastened us suemion onone electbm only becauie tbey will amount to the firet nationwide doctoral teat ii bit June but also because people recall Ihe extraordinary Communist ra gains in ihc same elections five years ago which originally brought the nutrition of Communist participation in the national government to prominence. Communist losses io last June's parliamentary elections provided the first indication thai the parly's progressoremmc mle including cabinet ministries might not be as inexorable as had seen* all the patties will scrutinize ihc election results for hints about what the Communists" year in opposition has done to thexcialioc-aboul Comma nisi involvement in decisionmaking at the national level

Wilh so much at stake, ihe Christian Democrats have, strangely enough campaigned with less unity and with poorer preparation lhan ever before fact, tbey seem to be running two separate campaigns. Tbe right wuog.ie party chief Piccoli and former Foreign Minister Forlani. has focused ee traditional ami-Communist themes, apparently believing thai public support is turning in its direction. Il will be tempted to seek new parliamentary elections come fall if the voters deal theurther seth The party's left, on the other hand, long identified with the latead currently led by former party Secretary Zaetagnini hasof approach, stressing Ibe need for cooperation between Christian Dexnocr and Communists to solve the country's Ills. Lcftwing Christian Democr worry thai an all-out campaign againsl the Communists oould force the parly to retreatess coopciaiutfprm cf opposition that would make couniry impossible to govern

On past occasions when the Christian Democrats have found thcensehe badly divided and unable to compromise, ihey have finally come togetti protect their hold on power and iu perquisites(Since Moro's death, how tbc party has lacked an arbiter capable of reconciling the views ol the various factions^Party leaders are concerned about presenting an imag disarray and arc working to tone down party infighting until after the campaignjjjjjpg this, the parly may face scrioosootiabilftyj J

Socialist Party leader Craxi remains optimistic that the June elections aupport the present government formula. He recently expressed tbe op lhat the Cossiga government could last as long asa year. He believes lb. lefthole will lose votes but thai most of those losses will fall to tl Communists. The Craxi forces are booing thai tbe parly's recent agree Io support some of the small Radical Party's upcoming referenda effee

exchangeledge not to run candidates in the June elections will freerge enough chunk of the overall votes toal|ow.thcm to mmimize iheir losses and perhaps even register some gain!

Craxi probably has more alemocrat or Communisl counterparts. This election has become, tneferendum on his decision lokadihc parly tack mto partnership withtUie

Christiane lef. wing of the Socialist

take steps both lo replace Craxi with Claudio SignonleihcCossTga government if the ScciaUsts lose one-half percental the polls. The Icfiwinr- Socialists hope to replace lhc present gennwnmeni withajority*

Communisl Party leader Enrico Berlinguer emerged from the9 electoral debacle with his reputation and policies basically inua;he hadonsolidate his position to lhc face of several months of harsh criticism from within the party hierarchy and loud grumbling from lhe party base which forced him lo remove critics from power and elevate loyal followers lo Iheir vacant posts. Although the party remains committed to the -Historic Compromise-road spectrum of party members has become increasingly uneasy with this approach in view of parly electoral defeaisp

/Fully aware of this history. lhc party's leaders have commbsioncd an outside ^polling organization lo survey voters in an attempt toelter understanding of lhc party's actual strengths and weaknesses and put themselvesetter position to plan campaign tactics. The leaders are quite awareecline of ore to two percent would Itkcly set off another wave of unrest and criCirism within lhe party which could weaken their-hole on power over the long run. For lhc time being, however.ai decline of this rnagniiudecrjujd probably be absorbed without loo much diiTicullyj

ercent or more-would put tbe parly below2 benchmark and wouldore formidable challenge toeadership. Tbe process would uke several months to play out. and its chances of success would depend uponbility to read party sentiment and adjust his policieserlinguer ultimately faliers. his successors would probably realign the partyore aggressive opposition stance; even so. Communist opposition tactics probably would not revert completely to the hard line of lhe past

Polls and Prospects

Independent surveys show the Christian Democrats. Socialists, and sir !a> parties marginally improving their overall standings compared wilh performancehile the Italian Communists continue to dedin judge from the Italian electorate's most recenl performance ai the poll dramatic shifts in percentages arc noi in the cards;une election probably will not provide the clarity the politicians are seekinghe electorate wants or will stand too

Even though the Cossiga government will face increasing strain folio-the Summit regardless of theoulcomcof the election, the partiesrisis during the summer. The early fall is likelyhange in government and. if the Christian Democrats have done well possible dissolution of parliament and early parliamentary elections. Regardless of ihe results ofune balloting, the present goveramt probably will collapse withina few months of the election underf its own immobilism.

Currentturned in one of the OECD's mosl impressive economic perform

Situationyear and is likely io do better on the growth front this year lhan r

Short-Term Prospects other developed countries Real GNP wasercentuoy consumer spending and ciports, while tbc current account surplus torulioii, thanksobust surplus on invisibles. This strong showii marredpercent inflation and growing concern over July's long trade and energy positions. While momentum from last yearercent rise0 GNP.ccelerating and the currer account will end this year in sizable

The first Cossiga government failcdftotallv to implement an economii program to deal with Ihe commonly identified problems ofector deficits, wage reform, and energy divei5ification. Cossiga attei to solve problems piecemealeries of decree laws, mostxpired because of subsequent parliamentary inaction. His second gc mem finally made some legislative headway in late April of this year0 budget and financial law were approved by parliament; bot. been on the table since lastomprehensiveannot be expected from Ihe new government, at the very leastune elections, jjjicn the public's political preferences may be more discerning

Inflation

Inflation remains high and in April *as running ai an annual rale ofercent. Primary caialysls have been oil priceheindexation system,ump in private consumption. In its plan to fight rising prices, the government would like to:

Modify the wage escalator to exclude tbe impact of higher oil prices; any change certainly will be opposed vehemently by labor unions in the absence of costly government cooccssions.

Revive efforts to diversify energy sources; previous attempts lo move away from oil have, with Ihe exception of the oatural gas pipeline from Algeria, been rendered ineffective by parliamentary inaction and public opposition to nuclear and coal conversions.

Reduce the public sector deficit; thisraditional but elusive goal because or continued bureaucratic inertia and th* need to satisfy diverse and growing daims from too many crmsiiiuent groups, including finandaliy wrapped stale ir

-

0 budget is not expected to help in the fight againsl inflation. Consumer ux breaks and higher public spending this year imply an e* larger total public sector defieu (including local governments, transfers, and statehich may reach as much as JSO billion. Rome estimates it reduced the public secior deficitashercent of GDP last year6 percentis success, however, arose from deferring capital expenditures to later years and from unexpected increases in tax receipts. The government hopu lo decrease further Ihe cash deficitercentage of GDP ihis year; however, inflation, payment or deferred expenditures, and finanqaliflfusions needed by Male firms will make it difficult to hold ihc line.j

soaked uperccnl of total domestic credit expansion;

The Bank of Ittlyfrruch provided the only real defense against inflation last year>emains ihe major bulwark againsl inflation.be prune rate roseercent fromercent, whik ihe growth of ibe money supply was held6 percent compared8ear earlier. Money will be relatively tight again ihis year wilh ihe private sector feeling the biggest pinch. Two-thirds of total new domesticrobably be absorbed by the government's borrowing needs; last year ihc aovernmenl

"H

Current Accounl

9 current accounl surplus2 billion disguised some less favorable trends. The trade balance deierioratcd sharply in the sceor* of the year, bringing the lotal merchandise deficit to just over Jl billi compared9 billion surplushe deterioralionart to declining Italian comiven ess, which curtailed export moo turn, la addition, import growth, which had slowed, returned to tbe traditional pattern of more rapid rises than domesticargi invisibles sutalus. particularly tourism, was the key to the current ao surplus-

This year we expect the current account to swingeficit of near S3 billion as world trade falls off and the oil import bill rises. Prosper the currenl account may dim even further as export competitiveness continues to be undermined by rising labor costs. The lira deprccialk against tbe dollar since the beginning of the year will booslinceercent of Italy's imports (mostly oil) are denominated in d. On the export side, keeping the lira within its European Monetary S. (EMS) bands rules out lira depreciation toompetitivexports to the EC Italy's majortextiles, and foot arc facing increasing competition from newly industrialized coentri some exporters are beginning to complain that in the absence of cun deviation, ihe price differential will soon be too great lo coropens higher Italian duality. Govcrnmeol officials.intent ontrong lira as an anti-inflationary tool]

Growth

The carryover from9 fourth-quarter demand should bnr economic growth toercentonsumer demand wi continue upwardairly good pace throughout the year asscalator ensures real wage growth and tax breaks increase coosum liquidity. Nevertheless, the economy should slow io the second half year as the world economic slowdown gains momentum and ihc inr curtailed Italian export growth ripples through the economy. lives strong last year and in Ihe first halfill falter later this ye business optimism declines and tight money squeezes private credit slower economic pace should help curb inflation bat will still leave average for the year ofercent. Tbc demand slowdown willeal GDP growth should fall toercent as the cot spending spree wears off, investment remains sluggish, andJuJian competitiveness suffers from two years of rapid ioflationJ

(Prime Ministerihai lhc Venicee

^nl> marginally impcctaiuasantUinomic CCOJcrcnce. Cossiga contends thai lhe problems facing lhe parikipantt are cwerwbelmmgly political, and he hopes lhal lhc conferees will turn iheir attention to questions ol Western cohesion on Iran-nd the Middle East. The Italians believe France will oppose such discussion during formal Summit sessions, but they hope thai some procedural arrangement can be found lhal will allow the seven heads of fnvernment to consider these questions outside lhe normal Summit framework!

s concern that lhe Summit address ihe larger political issuespari Irom dismay that Italy continues lo be deluded fromcouncils, such as at Guadeloupe; il also reflects Italian weenesrelations may continue their downward slitle. wcrries lhatin the Prime Minister's mind by his belief ihaitens.c, serves to make the comes* pd.ucal situation hedifficult Given lheossiga willEaroeean approach consistent with his pensionhon sanctions against either the Soviet Union or

Italy perceives Inflation and energy as the foremost economic problems facing lhe Big Seven. Cossiga has had little success in hisc->mcsnc ant.-inflation fighl and puis much of the blame on imported inflatioo. He is hkelj to be receptive loany joinl iniUnlive laken by lhe partiopantson controlling inflation, panicularly ifjtjddresses the medium term and not jusl shon-nin

asrxcuoflheproblcrr

While paying Upower energy/GDP ratios and greatercoal use. Cossiga will be reluctant to commit Italy to specificprospects for keeping withinofl unpert urgetsIn the long run. however. Italy's dependence onilllubsunliaily before leveliog off. Even lhc mostindicate that luly will be able to generate only SO percent offrom nuclear power and coal by

lacktrong conservation program or failure lo achieve areduction in oil demand last year. Cossiga can sllll boast tat Italyowest per capita energy consumption among the Sumnui participants.

Romeombination of conservation ande-energy sources would be appropriate areas for energy* the Summit nations. Italy also is interested hs towering Umers iofun captation ofnd renewable energy milMmii luly. in addition to LDCs, can obuin financial or techacaogacal help for energy developmeni

Italyital stake in maintaining an open trading system, as it upon exports lo pay its energy bill and to nndcrgird growth. In spfi internal pressure Tor protectionism, particularly by large ailing ine Cossiga will support initiatives favoring irade liberalization. Italy probably like to have some sort of clarification on Allied export ere wilh respect to the Soviei Union; Cossiga will ensure that Italy dot any competitive ground in this area. The Italian consmiction.che; automotive, and nuclear industries all see great potential for Italy deals, and progress on most Italian sales proposals has practically since export credits were frozen in January. Rome has noted its di holding the credit Kim jflpj her Allks^particularlyimilarly resirair

Romepecial interest in the North'Sautk issue becauseerception of Italyridge between developed aod less dcrelo; countries. In his EC Presidency role. Cossiga hadrime obje widening of cooperation and communication with LDCs. Italy car expected to support and encourage the strengthening of the Nortl dialogue and expansion of trade and aid1 making any specific aid commitments. To relieve the burden of fa prices, particularly for LDCs, Cossiga favors broad cooperationf on payments. The Italians see the IMFas tbe key to recycling also pushtatement suggesting ihat OPEC nationsrr role by increasing foreign investment, particularly in LDCs.pTie also have expressed some concern that they may be cut outrench recycling initiative tied to West European exports of goot technologyJBeyondg. Italy has little interest inional monetary issues. Rome would stronglyositive slat the substitution accounl although realizing concrete decisions ai this lime around

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